Funding Models for Public Two & Four-Year Institutions (Finance)

Funding models refer to the ways in which higher education institutions acquire revenue to operate. As described by Ithaka S+R, there are significant differences between funding models for public two- and four-year institutions in the United States. The three largest revenue sources for four-year institutions are tuition and fees (20%); government appropriations (18%), and sales and services from hospitals (15%). Community colleges receive nearly half of their revenue from government appropriations, the majority from state governments. Non-operating grants and contracts, including revenue from Pell grants, represent 18% of total revenues, and tuition and fees comprise an additional 16% of revenue. Funding models from state governments for public higher education institutions typically include:

  • Incremental Funding: States set the level of appropriations in a given year and increase or decrease the amount by a fixed percentage annually. Appropriation levels are not calibrated to achieve specified outcomes, nor to incentivize the efficient use of institutional resources or reward specific performance indicators. Many states combine incremental funding with performance-based funding to enable attention to outcomes-based funding.
  • Formula Funding:  Funds for variation in inputs across institutions and enrollment changes annually. States calculate appropriations using a formula that accounts for specific inputs (e.g., number and characteristics of students enrolled, the level or field of study). States will often codify allocation formulas through legislation, so legislators and governing boards have fewer opportunities to intervene.
  • Performance-based Funding (PBF): Appropriations are based on the outcomes of the institution (e.g., number of degrees conferred). PBG accounts for a small portion of state appropriations (usually less than 25% of state funding). PDF is often paired with either formula or incremental funding (the formula or incremental approach provides a base level of funding and PBF provides variable funding that is based on performance).

States also provide significant funding directly to students through state financial aid programs.  These programs are often separate line items from appropriations and they result in a significant source of revenue for state institutions.  Additionally, some states provide funding for promise programs, vouchers, differential funding, and public-private partnerships.